Business Angels Question

What well known business was funded by a business angel?
Why they used this method of finance?
Why they chose it?
Been searching all over the internet and can't find anything, please help!

Reply 1

Khanthebrit

Unlike the conventional bank loan, there's no risk of losing your assets as an angel investor invests in exchange for equity, a given stake in the business, whereas debt finance would have you pay off the loan with interest. So in essence choosing, this method of finance can be seen as less risky for the entrepreneur - if you default on a loan, you could lose your house, or have the assets of your business/personal life sold to pay it off. You owe nothing to the angel investor who bought equity in the business other than the number of shares you offered to sell in exchange for his/her funding. Downside to this - if the business is booming and you gave away 50% for £100,000, yet a year later your business is now worth £1,000,000, you lost a potential £500,000 worth in shares along with 50% of the profits that business made during that year. Had this been the exact same scenario but with a loan, it is likely you would have paid the loan off at an interest of 3-5% and retained that £500,000 in shares and get to keep all the profits for yourself.

People generally choose it if they cannot obtain a loan, although that's not to say they choose both. Banks are a lot more risk-averse than angel investors, who are more willing to take on higher risks for higher rewards. So banks want to see a good cash flow, profit statements etc. Angel investors may understand that just because a business has a high burn rate, it doesn't mean it has the potential for success. Look at Dragon's Den. This method of finance also gives the entrepreneur a partner, a mentor perhaps. Someone with experience who can help run the business, his desire derived from his active stake of shares in the business.

Probably a lot of businesses you see today were either funded by venture capital or by angel investors. Do a little bit of research into the company history to find out.